[PPT] - Koreas Sovereign Asset Liability Management Joo Sueb Lee Director, PowerPoint Presentation

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Sovereign Debt Management Forum 2016 World Bank HQ, October 19~20th , 2016

Korea’s Sovereign Asset Liability Management

Joo Sueb Lee Director, Government Bond Policy Division, Treasury Bureau, Ministry of Strategy and Finance

Disclaimer The views expressed in the presentation does not necessarily represent those of the MOSF or the Korean Government

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Outline

▪ The Concept of SALM ▪ The Role of the Treasury Bureau ▪ SALM in General Government ▪ SALM in Public Sector ▪ Sovereign Wealth Fund ▪ Prudential Measures for External Balance

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SALM in terms of National Economy

Public Entities

GOVERNMENT

Central NATIONAL ECONOMY

< PRIVATE >

HOUSEHOLD CORPORATE

Non- Financial Public Entities

2

Financial SOEs

Local Local Local

External Balance Macro/micro Prudential Measure

Ministry of Strategy and Finance (Treasury Bureau)

Coordination & Consultation

Reporting, Plans, Guidelines, or Coordination, etc.

< PUBLIC >

e.g.) KIC(SWF), KDB, KAMCO, etc

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THE ROLES of TREASURY BUREAU (CFO of the Government)

Asset Management Infrastructure

Treasury Bureau

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Government Cash Management (Controller)

 Manage efficient government cash flows, Set up cash management schedules and plans  Allocate/manage treasury funds for budget execution

Government Debt Management (Debt Manager)

 Ensure stable bond issuance/ operate related policies  Develop government bond products/ devise and implement bond market regulations  Execute bond issuance, redemption, etc.

Government Property Management (Asset Manager)

 Enhance efficiency through integrated government property management  Devise/implement government property development policies  Execute policies on government investment and dividends  Manage and sell government-owned stocks and securities  Accounting and settlement of public enterprises and quasi government institutions  Policies on public contracts, procurement, market globalization

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CASH FLOW MANAGEMENT

All the government cash is converged Consolidated Account(=TSA; Treasury Single Account)
TSA introduced in 2005 to manage efficiently all government cash by minimizing idle money
Consisting of general account and 15 special accounts(excluding 3 accounts*)

* Postal Insurance/Postal Saving/Grain Management special accounts

The unified structure of government bank accounts composed of 7,200 sub-accounts under

General Account & each Special Accounts

Consolidated Account (TSA) General Account Special Account (Rural Structuring) Special Account

(Transportation Facilities)

Special Account

(Regional Development)

15 Special Accounts

7

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Cash Flow Management Structure

TSA

(Treasury Single Account)

PCMF

(Public Capital Management Fund)

General Account

Special Account

FUND

KTB Issuance

Idle Cash Mgmt Temporary Financing Revenue Revenue Expenditure Expenditure Financing Deposit Loan Loan

Capital Market / BOK

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Set Target Balance

Minimize Idle Money
Utilize resources

CASH FLOW MANAGEMENT

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DIGITALIZED CASH FLOW MANAGEMENT SYSTEM

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 Digital Budget & Accounting System  Real time basis Cash Flow and Expenditure Review

dBrain

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DEBT MANAGEMENT (MAIN FINANCING TOOL)

Treasury Bureau

79.0 ('14) 64.4 ('15) 76.6 ('18) 51.6 ('14) 45.7 ('15)

70.4 ('18)

25 50 75 100 '97 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Issuance(Trn Won) Adjusted Net Issuance(Trn Won)

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 Minimizing the costs and the risks of financing government’s needs  Mature market : Predictability, openness, efficiency (evenly spread monthly issuance)  Balanced Debt portfolio management(structure, maturity, duration, etc.) Annual Issuance Guideline 2016

3 YR 5 YR 10YR 20YR 30YR 20~30% 20~30% 25~35% 5~12% 8~15%

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Treasury Bureau

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Bond Market National Debt Financing

 3yr KTB  5yr KTB  10yr KTB  20yr KTB  30yr KTB  50yr KTB  Futures  KTBi

(inflation-linked)  Monetary Stabilization Bond  Mortgazed  Corporate Bonds(Credits) Treasury Bills  RP STRIPS

▪ By nature

debt (repaid by tax)
debt (repaid by

selling gov’t assets, etc)

total national debt

▪ By type

central gov’t

∙ gov’t bond ∙ loans ∙ others

local gov’t

∙ local gov’t debt ∙ debt from central gov’t ▪ Government bond coupon rates ▪ loan interest ▪ financing cost ▪ PD/PPD ▪ Forum for government bond market development ▪ Inter-government consultative TF ▪ Consultative TF (institutions) ▪ Meeting with experts ▪ Consideration of investor opinions

Outstanding balance /repayment amount

Yearly/monthly issue plan Time to maturity Spread out maturity dates Foreign investor proportion Holdings by investor/institution

Gov’t bond

utstanding/GDP

KTBs outstanding/GDP KTB ratio by year/type

National Housing Bond/KIB issue Deposit in general account

KTB bid-to-cover ratio Maturing debt amount KTB redemption amount Buy-backs/conversion

Trading vol./turn-over ratio

DEBT MANAGEMENT COMPONENT MATRIX

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GOVERNMENT PROPERTY MANAGEMENT

Integrated Management Comprehensive Plan Specialized Funds for Government Properties

GIS-based decision-making
Integrated statistical analysis
Mobile on site management
Transparency
Government Property Policy

Committee

Proper Assessment
Set up the rules a regulations
Intensive Consultation
Active Developer
Maximize Asset value with

long-term view

Efficient management (land,

buildings, software, etc.)

Sales oriented; to meet finance demand for Public Expenditure

1945~1976

Valuation oriented; Maintenance & Preservation

1977~1993

Expansion & Utilization; Active manager or Creative Developer

1994~Present

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PUBLIC SECTOR SALM - I : Annual Reporting on Fiscal Soundness

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Annual Public Sector Fiscal Soundness Management Report

 Goals of the Report (Since 2014)

 Comprehensive efforts for fiscal risk management in public sector as a whole

Systematic and comprehensive manner; Categorize fiscal risks in details
Enhance transparency (disclose to public annually)
Provide criteria for proper evaluation of “National Fiscal Position”

 Scope of the Report

 General government + Non-financial public enterprises(477 public entities)

include total debt of non-financial SOEs in central and local
Debt is reported on an accrual basis (including future debt and cash flow to pay)

=> priority on the fiscal soundness of the public Sector (debt instruments, debt securities, loans, other accounts payable, etc.)

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2014 Amount (tr won) Ratio to GDP (%) ▪ Public Sector Debt 957.3 64.5 ▪ Government Debt 620.6 41.8

Central Gov’t

569.3 38.3

Local Gov’t

58.6 3.9

Internal Transaction

7.3 0.5 ▪ Non Financial Public Enterprise 408.5 27.5 ▪ Internal Transaction 71.7 4.8

34.1 37.9 78.5 110.6 115.2 116.4 120.1 160.7 229.2 50 100 150 200 250 NOR KOR GER USA OECD UK FRA ITA JAN

(Debt-to –GDP ratio %, OECD EO 2015)

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“FISCAL RULES” : National debt/GDP ≤ 45%
“PAY-GO” rules
Budgeting based on Long-term fiscal outlook (every five yrs)
Priority on Fiscal stability for social insurances, management systems
Establishment/implementation/evaluation of plans for fiscal soundness

Public Sector Fiscal Soundness Management Report 2015

PUBLIC SECTOR SALM - I : Annual Reporting on Fiscal Soundness

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Mid-term National Fiscal Operation Plan

 Five-year fiscal Rolling Plan

Program Budgeting : efficiency, fiscal soundness, long-term view, etc.
Strategic Resource allocation (beyond short-term myopic view)

 Gradually improved as Overarching & Comprehensive plan

First started as simplified mid-term fiscal expenditure plan in 1982
In 2004, developed as five-year “comprehensive rolling plan”
In 2007, submitted to the Assembly as a compulsory legal duty
In 2010: revenues categorized into nat’l tax, non-tax receipts, fund

revenues; Consolidated fiscal balance/National debt Projection

In 2012, Projection of future expenditure (bottom-up approach) -

government, public enterprises and quasi-government institutions

In 2014 Mid-to-long term taxation policy management plan included

PUBLIC SECTOR SALM - II : Mid-term Fiscal Plan(Rolling Plan)

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National Fiscal Operation Plan (2016~2020)  Based on the outlook on economic conditions in and abroad (SALM scenarios)

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’17 ’18 ’19 ’20 Average Rate of Increase

Original Budget Supplementary Budget

▣ Revenues (trn won) 391.2 401.0 414.5 436.0 456.3 476.4 5.0 ㅇ National Tax 222.9 232.7 241.8 252.1 264.5 277.2 5.6 ㅇ Non-tax Receipts 27.2 27.2 26.2 28.2 27.1 26.2 (0.9) ㅇ Fund Revenues 141.1 141.1 146.6 155.8 164.7 173.0 5.2

’16 ’17 ’18 ’19 ’20 Average Rate of Increase

Original Budget Supplementary Budget

▣ Expenditures (trn won) 386.4 398.6 400.7 414.3 428.4 443.0 3.5 (rate of incr, %) (2.9) (6.2) (3.7) (3.4) (3.4) (3.4) ㅇ Mandatory spending 182.6 186.7 195.6 204.8 215.1 226.2 5.5 ㅇ Discretionary spending 203.8 211.9 205.1 209.5 213.3 216.8 1.6

PUBLIC SECTOR SALM - II : Mid-term Fiscal Plan(Rolling Plan)

 Expenditures Outlook by Field  Outlook on fiscal operation conditions (Revenues in detail)

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National Fiscal Operation Plan (2016~2020)  Fiscal Balance Outlook

’16 ’17 ’18 ’19 ’20 ▣ Operational budget balance (trn won)

39.1
28.1
25.0
23.2
20.4

(Ratio to GDP, %)

(-2.4) (-1.7) (-1.4) (-1.2) (-1.0)

※ Consolidated budget balance (trn won)

2.4 13.8 21.7 27.9 33.4

(Ratio to GDP, %)

(0.1) (0.8) (1.2) (1.5) (1.7)

’16 ’17 ’18 ’19 ’20 ▣ Gov’t Debt (trn won)

637.8 682.7 722.5 756.8 793.5

(Ratio to GDP, %)

(39.3) (40.4) (40.9) (40.7) (40.7)

ㅇ Debt to be repaid with tax revenues

368.0 397.5 423.3 448.5 471.8

ㅇ Debt to repaid by selling gov’t assets, etc

269.8 285.2 299.2 308.4 321.7

PUBLIC SECTOR SALM - II : Mid-term Fiscal Plan(Rolling Plan)

 Mid-term Government Debt Outlook

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Fiscal Soundness Sectoral Expenditure

Healthcare/welfare/employment
Education
Culture/sports/tourism
R&D
Industries/SMEs/energy
SOC
Agriculture/forestry/fisheries
Environment
National defense
Diplomacy/reunification
Public order/safety
General & local administration
Restructure public expenditure
Consolidate repetitive projects
Promote private-public partnerships
Expand revenue base
Improve fiscal management system
Integrated management system for

government subsidies

National Fiscal Operation Plan (2016~2020)

 General direction of fiscal operation  Policy tools for disciplined fiscal management  Measures to enhance fiscal management efficiency through continuous fiscal reforms

PUBLIC SECTOR SALM - II : Mid-term Fiscal Plan(Rolling Plan)

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FINANCIAL STATEMENT : Balance Sheet of RoK Government

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* Accrual basis(tr won) 2014 (A) 2015 (B) Net Change (B-A)

◇ Asset (A) 1,759.3 1,856.2 96.9 Current Assets 316.6 352.8 36.2 cash, deposits Investment Assets 618.5 664.9 46.4 long-term deposits, securities Tangible Assets 514.6 523.5 8.9 land, buildings Social Infrastructures 300.1 305.9 5.8 roads, railways, ports Intangible Assets 1.1 1.2 0.1 software, etc OtherNon-currentAssets 8.4 7.9 △0.5 long-term trade receivables ◇ Liability (B) 1,212.7 1,284.8 72.1 Current Liabilities 119.1 132.8 13.7 KoreaTreasury Bonds (less than 1 yr), loans Long-term Liabilities 381.9 421.0 39.1 KTBs, public loans, etc Long-term Provisions 682.3 699.9 17.6 pension, retirement, post- retirement liabilities, etc OtherNon-currentAssets 29.4 31.1 1.7 long-term payables (BTL, rentals) ◇ Net Asset (A-B) 546.6 571.4 24.8

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* Cash basis (tr won)

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FINANCIAL STATEMENT : Total Debt of RoK Government

2014 Total (A) 2015 Net Change

Exp*(B) Total (C) YoY (C-A) Compared to Exp(C-B) ◇ Central Government (A) 503.0 561.2 556.5 53.5

4.7

(Ratio to GDP, %) (33.9) (36.3) (35.7) (1.9%p) (-0.6%p) ▪ Gov’t bonds 498.1 556.2 551.5 53.5

4.7
Korea Treasury Bonds

438.3 490.6 485.1 46.8

5.4
Korea International Bonds

7.0 7.0 7.1 0.1 0.1

National Housing Bonds

52.8 58.7 59.3 6.5 0.6 ▪ Loans 2.6 3.1 3.3 0.7 0.2 ▪ Others 2.4 1.8 1.7

0.7
0.1

◇ Local Government (B, Exp.) 30.1 34.0 34.0 3.8

◇ National Debt (A+B, Exp, D1)

533.2 595.1 590.5 57.3

4.7

(Ratio to GDP, %) (35.9) (38.5) (37.9) (2.0%p) (-0.6%p)

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SOVEREIGN WEALTH FUND (Korea Investment Corporation)

Established in 2005 by the ACT
Financial Asset Management Role
Trusted by Government, BoK and public funds
The Steering Committee (decision making body)

Six financial experts + Minister of Finance + Governor of BoK + CEO of KIC

1 15.5 21.6 29.6 36.9 42.9 56.6 72 84.7 91.8 200 50 100 150 200 250 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2030e ($bn)

Assets Under Management

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STRENGTHENING EXTERNAL SOUNDNESS

Macro-prudential measures

Cap on FX derivatives positions: domestic banks(40%) , foreign bank braches(200%)
Stability Levy: 10% levy on non-deposit foreign currency liabilities
Restoring withholding tax on foreigners’ bond investment

(equal treatment between residents and non-residents) Micro-prudential measures

Introducing Foreign Currency Liquidity Coverage Ratio:

Minimum ratio(domestic banks): 2017(60%) → 2018(70%) → 2019(80%)

Mid-to Long-term Funding Resources Ratio

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TAKEAWAY

 Numbers matter

Accurate statistics and reporting system

 Don’t be in a hurry

SALM is not a sprint; It’s a marathon
Needs enough of time and enormous resources.

 It’s all about “Starting”

There is no short-cut. Just start where you are, what you can do

 Don’t be alone (coordination, cooperation, & integrity)

Show and share the benefit, mobilize support in and out

ex) Public Capital Management Fund (risk reduction through buffer)

 External Balance

Resilience to external shock (open economy with non-key currency)

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